INDIA: Reducing student loan burden

Education Minister Kapil Sibal has unveiled measures to reduce the burden of education loans on poorer families. They are among policies to increase the proportion of young people in higher education and improve access for lower income families.

They include concessionary loan rates for poorer students and measures to guarantee education loans to encourage banks to lend to low-income families who may not have substantial collateral.

"When...every child has free access to a loan why will he need to sell the family silver to enter into an educational institution?" Sibal said in March.

The education ministry has set aside five billion rupees (US$106.6 million) in the 2010-11 budget for education loan interest subsidies and Rs1.08 billion for college and university scholarships.

The ministry has agreed to provide full interest subsidy from banks to economically disadvantaged students.

Under the ministry's new scheme interest payable by the student for the length of the course plus one year, or six months after getting a job - whichever is earlier - will be borne by the government.

The ministry is also working on a refinance scheme for educational loans at interest rates as low as 4%, compared with 10-15% at present, and wants to reduce the loan burden further by extending repayment periods from between five and seven years to between six and 12 years.

The government has already decided to set up a National Education Finance Corporation or NEFC to refinance banks on this count. It will also lend at concessional rates to students and educational institutions.

The corporation will charge 4% interest for students whose parental income is under Rs450,000 a year. It will be 7% for parental income above this mark but requiring an education loan of less than Rs1,200,000. Loans above this figure, including for overseas study, will be charged at 9%.

The ministry is now working on a plan to set up a loan guarantee authority as a separate division within the NEFC to give easier access to educational loans. The aim is to increase the gross enrolment ratio in higher education for18-30 year olds from the existing 12.4% to 30% by 2020.

"Indian public sector banks have an outstanding Rs350 billion in education loans. While many students pay up, banks would be more open to increasing their education loan portfolios if the government stood as a guarantor against loans," said TY Prabhu, Chairman and Managing Director of the Oriental Bank of Commerce.

If the NEFC stands as a guarantor it will have to pay only for defaulters. This would also act as an insurance cover for banks.

"Many times the lack of a guarantor or collateral results in a student not getting a loan. If the NEFC is ready to do this many more students, especially the poor, will get easy access to education loans," said Prabhu

Loans of up to Rs400,000 do not require any collateral; loans between Rs400,000 and Rs750,000 require a third-party guarantor. Credit above Rs750,000 needs to be backed by tangible collateral security such as property, preferably houses, government securities, gold, shares or a third party with assets matching the loan amount.

However experts feel there should be options other than loans available to students.

"Students going abroad have to pay a steep fee if they are unable to find scholarships. But for those opting to study in India the government should make more scholarships available," said Sudhanshu Bhushan, head of the department of higher and professional education at the National University of Educational Planning and Administration in New Delhi.

Bhushan also believes some public institutions should charge differential fees, which may require increases for richer families. "If you subsidise education in the University of Delhi, 80% of rich students benefit from it. There should be a differential fee system and students should pay according to their parents' income."